DESPITE their youthfulness, Glenn Greenberg and John Shapiro are seasoned veterans of the investment wars. They’ve been in the Street for a dozen years, serving apprenticeships in the usual places (Glenn at Morgan Guaranty, John at Merrill Lynch), then moving on to more venturesome ground — running a large private portfolio — and finally, several years ago, launching their own firm, Chieftain Capital Management. In essence, they manage something like $150 million of capital for individuals and their record shows they manage it exceedingly well. Since Chieftan was born in January 1984, its performance has exceeded the S&P 500 by an average of 15 percentage points annually. Like the rest of the world, Glenn and John were shocked by the October crash, but unlike much of the world they’re not entirely convinced the bad days are over. However, they also feel there are interesting values to be found, even in the worst of markets, and they talk about some in the following Q & A.
BARRON’S: As we understand it, you’re value investors. A value investor is someone who hadn’t done very well this year even before the crash.
Shapiro: That’s a pretty good description. Although, most years, I wouldn’t turn down our performance of the first nine months and, of course, right now, I surely wouldn’t.
Q: Tell us, though, how do you guys define a value investor?
Glenn Greenberg: I’ll take a cut at it. I think all value investors look for a disparity between the current market price of shares and the value of the franchise; at what price or liquidated. And so one beginning point for us is to look for companies that are selling at half of what we think they’re worth. And our valuation or appraisal tends to be on the low side.
The second thing we look at is to see whether these are good businesses. And that sort of falls into the Warren Buffett-type idea that a good business is one that has predictable cash streams, throws off excess cash after capital expenditures, isn’t easy to attack by competition, is not highly volatile. We look for these characteristics, and many of the companies we look at are what I refer to as geodes, stones that from the outside to a casual observer look to be ordinary rock, but when you crack them open and look very carefully you see beautiful crystals.
Shapiro: I would add another point. I think one of the big differences between the value investing we do and what other people call value investing is patience. We have plenty of it.
Q: The merger and acquisition boom, of course, has made geniuses out of a lot of people who call themselves value investors. Do you think every time you buy a stock that it’s going to be taken over?
Shapiro: No. Definitely not. I think we’ve had maybe one takeover of a position we’ve owned in the almost four years since we’ve set up our own shop. We look for the value to be realized because the business has a value, not because somebody’s going to come and pay more than you did.
Glenn Greenberg: A second way it gets realized is by management retiring a significant amount of shares outstanding. Because if the business does generate cash, and if it’s selling at a low absolute multiple, the best revenge on the stock being neglected is for management to retire shares.
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